Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in cancelling the penalty of Rs. 4,194, Rs. 65,000 and Rs. 62,000 levied by the IAC under s. 271(1) (c) for the asst. yrs. 1962-63, 1964-65 and 1965-66 ?

High Court Of Delhi

Additional Commissioner Of Income Tax vs. Motorlite Mfg. Co.

Sections 271(1)(c)

Asst. year 1962-63, 1964-65, 1965-66

Arijit Pasayat, C.J. & D.K. Jain, J.

IT Ref. Nos. 264 to 266 of 1979

5th December, 2000

Counsel Appeared

Sanjiv Khanna & Ajay Jha, for the Applicant : None, for the Respondent


Arijit Pasayat, C.J. :

All these three reference applications involve identical questions which have been referred in terms of direction of this Court under s. 256(2) of the IT Act, 1961 (‘the Act’) by the Income-tax Appellate Tribunal, Delhi Bench A, (in short ‘the Tribunal’) for the asst. yrs. 1962-63, 1964-65 and 1965-66 :

“(i) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in cancelling the penalty of Rs. 4,194, Rs. 65,000 and Rs. 62,000 levied by the IAC under s. 271(1) (c) for the asst. yrs. 1962-63, 1964-65 and 1965-66 ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that no penalty is exigible even by taking recourse to the Explanation to s. 271(1)(c) of the IT Act, 1961 ?”

2. Background facts in a nutshell are as follows : Assessee was originally a partnership-firm evidenced by under an instrument of partnership dt. 12th Sept., 1960, which was subsequently amended and modified by another deed dt. 21st Nov., 1963. There were two partners—Mohinder Singh and Richpal Singh and each had 50 per cent share in profit and loss. The business consisted of manufacture of steel utensils, auto parts and accessories under the name and style of Motorlite Mfg. Co. In January, 1965, some unadjusted and unclosed books of account were seized by the police from the custody of Mohinder Singh. He disowned ownership over them. On the basis of these books and certain others surrendered by Jagdish Lal, accountant, proceedings were initiated under ss. 147 and 148 of the Act for the asst. yrs. 1962-63 to 1965-66. Notices were served on Mohinder Singh who w.e.f. 3rd Jan., 1965, had become sole proprietor. No returns were filed. After August, 1966, he became untraceable. Meanwhile Richpal had left the country in May, 1965, after executing a general power of attorney in favour of Jagat Singh. Richpal Singh and his attorney started correspondence with the ITO. Some returns were filed. ITO was requested to summon the firm’s books from the police and verify them. It was stated that there were huge losses and they held a decree for consideration of Rs. 33,000 from Mohinder Singh, he could not realise any part thereof. Returns were filed for the asst. yrs. 1962-63, 1964-65 and 1965-66 on various dates. Most of the returns disclosed income as nil. Assessments were made on total income of Rs. 37,500, Rs. 65,000 and Rs. 62,000. The aforesaid figures were arrived at by estimate of sales and application of gross profit rate of 15 per cent for 1962-63 and 16 per cent for 1964-65 and 1965-66. The total income fell short of limit prescribed and, accordingly, proceedings were initiated under s. 271(1)(c), and later referred to the Inspecting Assistant Commissioner (in short ‘IAC’) under s. 274. After verification of material on record penalties were levied. These were assailed before the Tribunal in three appeals, i.e., ITAs 3978 of 1973, 3981 of 1974 and 3982 of 1974. The Tribunal recorded the following finding to hold that penalty was not leviable : “It is surprising that the ITO made no mention of the sales disclosed in the assessee’s books, which were stated to be unclosed and unadjusted. It is, therefore, absolutely clear that the ITO was not even in a position to charge the assessee of having suppressed its sales to the IT Department, far less was he in a position to establish that the assessee had actually made certain profits and that it had concealed the same from the IT Department. As such, we have to hold that the charge of concealment of income must fail. We may in this connection record on important respect in which the assessments for the asst. yrs. 1962-63, 1964-65 and 1965-66 differ from that for the asst. yr. 1963-64. For the 1st named year, the ITO has been able to correlate the entries in the diary seized by the police with those made in the books of account produced before the IT Department. It is clear from the assessment orders for the other three years that there was no such connection.

The next point for consideration is whether in view of the applicability of the proviso to s. 271(1) (c), the assessee should be deemed to have concealed its income. In this respect the significant points to notice are that the books of account were unclosed and unadjusted, the managing partner, who knew anything about the books, had not filed any return and became untraceable. In this position, the other partner Shri Richpal Singh who had evidently not been taking active part in the running of the firm’s business, filed some returns estimate and made no secret of how he had arrived at those figures. As Sh. Mohinder Singh, the managing partner, had made himself scarce, the IAC could naturally not made any attempt to give him an opportunity of being heard. So, a probe into his conduct was just not possible. In this context, it will be quite impossible to hold that the failure to return the correct income did arise out of any fraud or gross or wilful neglect, calling for the levy of penalty under s. 271(1)(c). On the facts of the case, we are of the view that the ratio of the Kerala High Court’s decision in CIT vs. Sankarsons & Co. (1972) 85 ITR 627 (Ker) are clearly applicable and no penalty is exigible, even by taking recourse to Explanation to s. 271(1) (c).” Applications for reference under s. 256(1) was not entertained and on being moved under s. 256 (2), the questions have been referred. We have heard the counsel for the Revenue. There is no appearance on behalf of assessee.

3. The counsel for the Revenue submitted that the true import of the Explanation to s. 271(1)(c) which was added from 1st April, 1964, was not noticed. We find that the Tribunal was conscious of the Explanation. But on the facts of the case came to hold that the concealment was not proved. Order passed by the IAC does not form part of the paperbook. Same has also not been filed by the Revenue at the time of hearing. In these circumstances, it is not possible to know as to what weighed with IAC. But in view of the factual conclusions arrived at by the Tribunal, we find no question of law arises and, therefore, we decline to answer the question referred.

[Citation : 254 ITR 713]

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